Merits and Demerits of Indirect Taxes are explained below:
Merits of Indirect Taxes:
1. Indirect taxes have a great merit of convenience. They are paid in small amounts and at intervals instead of in one lump-sum.
2. The burden of an indirect tax is less felt as it is hidden in the price of the commodity.
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3. Indirect taxes can be elastic if they are imposed on articles having inelastic demand.
4. Indirect taxes have a wide area of functioning. It makes the tax system broad based as they are paid by all classes of people.
Demerits of Indirect Taxes:
1. The main demerit of indirect tax is that they are often inequitable. If imposed on commodities of common consumption, the burden of taxation on the poorer section may be heavy. It means it is regressive in character.
2. The cost of collecting indirect taxes is often very high.
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3. The yield from indirect taxes is often low.
4. Discriminatory indirect taxes may discourage certain forms of production or lead to a diversion of capital and other resources to loss useful channels.
5. Indirect taxes, like direct taxes can be evaded by such methods as smuggling, falsification of accounts etc.
Budget 2001-02 emphasized need for growth in revenue, simplification and rationalisation of tax regime and effective tax compliance.